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Jurnal Administrasi Bisnis (JAB)|Vol. 57 No.2 April 2018| administrasibisnis.studentjournal.ub.ac.id

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STOCK VALUATION USING FREE CASH FLOW TO EQUITY (FCFE)

AND PRICE EARNING RATIO (PER)

(Study at Companies Listed on LQ-45 Index in Indonesia Stock Exchange Period

August 2017 - January 2018)

Rani Rachmawati Nila Firdausi Nuzula

Faculty of Administrative Science Brawijaya University

Malang

E-mail : ranirachma18@gmail.com

ABSTRAK

Valuasi saham adalah salah satu hal penting dalam berinvestasi. Tujuan dari valuasi saham adalah untuk membantu investor meminimalkan risiko investasi melalui nilai intrinsik dalam membuat keputusan investasi. Model evaluasi untuk menghitung nilai intrinsik dalam penelitian ini adalah analisis fundamental dengan Free Cash Flow to Equity (FCFE) dan Price Earning Ratio (PER). Penelitian ini menggunakan penelitian deskriptif dengan menggunakan populasi penelitian pada perusahaan yang terdaftar pada Indeks LQ-45 di Bursa Efek Indonesia periode Agustus 2017 - Januari 2018, yang terdiri dari 45 perusahaan. Peneliti menggunakan teknik purposive samplingdan menghasilkan 18 perusahaan sebagai sample. Hasil menggunakan pendekatan Free Cash Flow to Equity (FCFE) menunjukkan bahwa 9 perusahaan dalam kondisi undervalued dan 9 perusahaan dalam kondisi overvalued. Sementara, hasil menggunakan pendekatan Price Earning Ratio (PER) menunjukkan bahwa hanya 4 perusahaan dalam kondisi undervalued dan 14 perusahaan dalam kondisi overvalued. Rekomendasi keputusan investasi dapat diambil untuk perusahaan dalam kondisi undervalued adalah membeli atau menyimpan saham dan rekomendasi keputusan investasi untuk perusahaan dalam kondisi overvalued adalah menjual saham. Ada beberapa perusahaan yang memiliki rekomendasi serupa untuk keputusan investasi dari kedua pendekatan tersebut, yaitu AKRA, BBCA, BBRI, BMRI, KLBF, PTBA, UNTR, dan UNVR.

Kata Kunci :Valuasi Saham, FCFE, PER.

ABSTRACT

Stock Valuation is one important thing in investing. The aim is to help investors to minimize the risk of investment through intrinsic value in making investment decisions. The evaluation model for calculate the intrinsic value is fundamental analysis with Free Cash Flow to Equity (FCFE) and Price Earning Ratio (PER). This research uses descriptive study using research population on companies which listed on the LQ-45 Index in Indonesia Stock Exchange period August 2017 – January 2018, it consist of 45 companies. Researcher using purposive sampling technique that was selected 18 companies. The results using Free Cash Flow to Equity (FCFE) approach indicates that 9 companies in undervalued condition and 9 companies in overvalued condition. While, the results using Price Earning Ratio (PER) approach shows that only 4 companies in undervalued condition and 14 companies in overvalued condition. The recommendation of investment decision can be taken for companies in undervalued condition is to buy or keep the stock and the recommendation of investment decision for companies in overvalued condition is sell the stock. There are several companies that have similar recommendation of investment decision between both approach, those are AKRA, BBCA, BBRI, BMRI, KLBF, PTBA,UNTR, and UNVR.

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I. BACKGROUND

The current growing economy will encourage companies to raise funds in financing all sorts of activities. This financing will result in changes in the capital structure of the business entity. There are two main alternatives financing. The first is acquisition of new debt or the capital increase and the other financing is by selling stocks or ownership of a business entity.

Financing by selling stocks or ownership of business entity can be done by companies that have been go public. Go public is an activity of offering stocks or other securities by issuers to the public. This activity is conducted based on the procedures governed by Capital Market Law and the Implementation Ordinance (Sunariyah, 2006:32). The companies have to be listed on the capital market to offer their securities, so investor can do investment activities related with their securities.

In investing activity, investor has a variety option to choose financial instrument in capital market such as stock and bond. Investors who want to play safe (risk averse) usually tend to invest their money to choose bond with certain return. It is different with investor who interest challenges (risk taker), they usually tend to choose invest in common stock. Investor's interest to do investing activity has increased especially in stock.

Stock is one of the most popular instruments in the capital market. Investing in stock will get profit such as dividend and income from the difference between the selling price of stocks and the purchase price (capital gain). However, investing in stock contains high risk and it is kind of challenge for investors. Investors believe that the higher risk will provide higher profit as well. It is called high risk – high return, high return will be followed by high risk too (Tandelilin, 2010:9).

One of the ways that can help Investor to

The purpose of valuation is to determine the intrinsic value of the stock. The intrinsic value is the true value, this value reflects the actual stock price of the traded stock (Jogiyanto,

2014:160).This value will help in taking the decision to buy or sell or save the stock.

There are two analysis that are widely used to determine the actual value of stock, that is fundamental analysis and technical analysis (Jogiyanto, 2014:160). Besides that, there are several approach in stock valuation. According to Husnan (2003:280) explain two models of stock valuation, those are Present Value Approach and Price Earning Ratio (PER) Approach. According to Damodaran (2002:11) there are three approaches to valuation, those are Discounted Cash Flow (DFC) valuation (include Free Cash Flow to Equity (FCFE) and Free Cash Flow to Firm (FCFF)), relative valuation contingent claim valuation.

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45 index becomes the object of research related to stock valuation.

Based on the background above, this research entitled “Stock Valuation using

Free Cash Flow to Equity (FCFE) and Price Earning Ratio (PER) (Study at Companies Stocks listed on LQ-45 Index in Indonesia Stock Exchange period August 2017 –January 2018)”.

II. LITERATURE REVIEW

A. Capital Market

Capital market is a market of long-term financial instrument, such as debt, stock, derivatives instrument and others (Darmadji, 2008:1). According to Sunariyah (2003:4) capital market in general is an organized financial system. Commercial banks, all intermediary institutions in the finance field and overall securities include in there. While in a narrow sense, the capital market is a place to trade stocks, obligations, and others securities using the services of securities brokers.

B. Investment

An investment is the commitment of funds or invests the capital to one or more assets that will be held over some future time period. It is refers to investing more in assets or it is not only one asset (Jones, 2000:3). The people who did investment activities are investor. Investor divided into two, there are individual investors and institutional investors. Individual investors consist of individual that do investment activities, while institutional investors consist of companies that do investment activities (Tandelilin, 2010:2).

C. Stock

Stock is an instrument that indicates an individual or institution enclose their capital in a company (Nasarudin, 2004:188). According to

Sunariyah, (2003:30) stock are equity

participation in the ownership of issuer. The ownership of the stock is mean that the ownership of company part. If the investor buys stock of a company, the investor will be one of company owners.

D. Stock Price Valuation

In making investment decisions, investors need to make a valuation of the stocks to be selected for proper investment decisions and generate the return as expected. Stock valuation

conducted to produce information in the form of intrinsic value. The intrinsic value of the stock will be compared with the stock market price to determine the position of sale or purchase of a company's stock. Calculating intrinsic value or the actual stock price is to avoiding loss and obtained a satisfactory profit. Calculation model is a mechanism to calculate company variables such as sales, profit and dividend to be an estimate of stock prices (Halim, 2015:4). Several analysis in intrinsic value calculation as follows:

1. Technical analysis

Technical analysis is an analytical technique that uses market data such as demand and supply of the stock (Sunariyah, 2003:152). 2. Fundamental analysis

Fundamental analysis is the analysis of stock’s value that use basic data such as earning, sales and risk (Jones, 2000:303). In conducting stock valuation, there are several approaches of valuation which already explained by experts.

1. Discounted Cash Flow (DFC) a. Free Cash Flow to Firm (FCFF)

Free Cash Flow to Firm (FCFF) is the cash flow after tax accumulated from business activities of the company, minus capital investment and net working capital (Bodie, 2014:301).

Source: Bodie (2014:301)

b. Free Cash Flow to Equity (FCFE)

Free Cash Flow to Equity (FCFE) is the cash flow left over after meeting all financial obligations, including debt payments, and after covering capital expenditure and working capital needs

(Damodaran, 2002:351).

Source: Damodaran, 2002 :252)

There are several growth models in this approach.

Where:

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91 ∑ � SBI = Average of interest rate of

SBI

N = Number of month in a

year.

a. Rate of individual stock return ( _�)

Source: Jogiyanto (2014:237) Where:

�,� = Rate of individual stock return in t time (month)

�� = Current stock price (closing price)

��− = Previous stock price (closing price)

� = Dividend in t time (month) b. Rate of market return ( )

Souce: Jogiyanto (2014:370) Where:

�,� = Rate of market return in t time (month)

� = Current composite stock price index

�− = Previous composite stock price index

c. Beta (β )

Source: Tandelilin (2010:195)

or

Source: Jogiyanto (2012:383) Where:

�� = Beta

��,� = Covariance of securities return and market return

� � = Variance of market return �� = Rate of individual stock return ��

̅̅̅̅ = Average rate of individual stock return

�� = Rate of market return ��

̅̅̅̅̅ = Average rate of market return

d. Cost of Equity (Ke)

Where:

Ke = Cost of equity

E � = Expected market portfolio Return

βi = Beta

� = Risk-free rate of return e. Growth rate (g)

Source: Tandelilin (2010:315) f. Free Cash Flow to Equity (FCFE)

Source: Damodaran, 2002 :252

g. Expected Free Cash Flow to Equity (FCFE )

Source: Gardner, McGowan, and Moeller (2012:3)

h. Intrinsic value (Constant Growth FCFE approach)

Source: Damodaran (2002:359) i. Investment decision

1) Intrinsic value > market price = “undervalued”. The decision is buy the stock or save it.

2) Intrinsic value < market price = “overvalued”. The decision is sell the stock.

3) Intrinsic value = market price, the decision can be sell or buy or save depend on the investor condition.

1. Price Earning Ratio (PER) Approach a. Calculate growth rate (g)

Source: Tandelilin (2010:315) b. Calculate Earning per share (EPS)

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Source: Tambunan (2007:248) Where:

= EPS estimation (2016) = EPS previous year (2015) g = Growth rate of the company c. Calculate Dividend per share (DPS)

estimation

Source: Tambunan (2007:230) Where:

= DPS estimation (2016) = DPS previous year (2015) g = Growth rate of the company d. Calculate Expected return (k)

Source: Brigham and Houston (2010:394) Where:

k = Expected return

= DPS estimation (2016)

Po= Market price of stock (closing price 2016)

g = Growth rate of the company e. Calculate Price Earning Ratio (PER)

estimation

f. Calculate intrinsic value (PER approach)

Source: Tandelilin(2010:377) j. Investment decision

1) Intrinsic value > market price = “undervalued”. The decision is buy the stock or save it.

2) Intrinsic value < market price = “overvalued”. The decision is sell the stock.

3) Intrinsic value = market price, the decision can be sell or buy or save depend on the investor condition.

IV. RESULT AND DISCUSSION

1. Free Cash Flow to Equity (FCFE) Approach

a. Calculate risk-free rate of return ( _�)

The calculation of risk-free rate of return is represented by interest rate of Bank Indonesia Certificate (SBI). Based on the analysis, mostly the fluctuation of risk-free rate in Indonesia period 2013 - 2015 are changing about 0,25%. The calculation of risk-free rate of return period 2013-2015 is as follows:

�

=

∑ �� SBI

=

. = 0,005984

Where:

� = Risk-free rate of return

∑ � SBI = Average of interest rate of SBI

N = Number of month in a year

The value of risk-free rate of return period 2013-2015 is 0,005984.

b. Rate of individual stock return ( _�)

Table 1 Rate of individual stock return (�_�)

period 2013-2015

No Emiten

Code � No

Emiten

Code �

1 ADRO -0,02372 10 ICBP 0,01850 2 AKRA 0,02334 11 INDF 0,00005 3 ASII -0,00044 12 INTP 0,00769 4 BBCA 0,01188 13 KLBF 0,00858 5 BBNI 0,01466 14 LSIP 0,00077 6 BBRI 0,01656 15 PTBA -0,02208 7 BMRI 0,00517 16 SMGR -0,00380 8 BSDE 0,01307 17 UNTR 0,00117 9 GGRM 0,00592 18 UNVR 0,01756 Source: Data processed by Researcher, 2017

The table shows from 18 companies, AKRA is the company that has the highest value. The value of AKRA reaches 0,02334. While, the lowest value of the rate of individual stock return is ADRO with the value of -0,02372.

a. Rate of market return ( )

Market return is the rate of return based on the stock price index development or Index

Harga Harga Saham Gabungan (IHSG). Rate of market return ( _�) period 2013 - 2015 is obtained from the total _� divided by the total months in 3 years. The calculation of Rate of market return ( _�) period 2013-2015 is as follows:

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Jurnal Administrasi Bisnis (JAB)|Vol. 57 No.2 April 2018|

Table 2 Beta (β) of the companies

No Emiten

Source: Data processed by Researcher, 2017

Based on the Table 4.5, the results of the calculation show that the highest beta is BSDE with the value of 2,07658. While, the lowest value of beta is -0,01926 owned by ADRO. There are 7 companies have beta more than 1 (β>1) and 11 companies have low risk or beta more less than 1 (β<1).

c. Cost of Equity (Ke)

Table 3 Cost of equity (Ke) period 2013-2015

No Emiten

Based on the table, it is known that the stock of PT. Adaro Energy Tbk. (ADRO) has the highest cost of equity (Ke) than the other stocks. While, the lowest value is owned by PT. Bumi Serpong Damai Tbk. (BSDE). The result is different from the common theory that the higher beta will provide higher return too.

d. Growth rate (g)

Table 4 Growth rate of the companies period 2013 - 2015 Source: Data processed by Researcher, 2017

The table shows the result of growth rate calculation period 2013-2015 on the 18 sample companies. There are 9 companies generate

e. Free Cash Flow to Equity (FCFE)

Table 5 Free Cash Flow to Equity (FCFE) period 2015

No Emiten Code (Rupiah)

1 ADRO _{20.051.123.950.000,00}

2 AKRA 2.739.442.898.000,00

3 ASII 63.428.000.000.000,00

4 BBCA 35.545.806.000.000,00

5 BBNI 31.660.899.000.000,00

6 BBRI 22.978.772.000.000,00

7 BMRI 14.935.152.000.000,00

8 BSDE 4.315.366.783.485.00

9 GGRM 10.222.039.000.000,00

10 ICBP 4.950.150.000.000,00

11 INDF 12.092.874.000.000,00

12 INTP 11.727.796.000.000,00

13 KLBF 3.848.430.999.173,00

14 LSIP 2.818.861.000.000,00

15 PTBA 2.148.317.000.000,00

16 SMGR 11.107.217.589.000,00

17 UNTR 28.502.784.000.000,00

18 UNVR 7.571.425.000.000,00

a. Expected Free Cash Flow to Equity (FCFE )

Table 6 Expected Free Cash Flow to Equity

( � _�) period 2016

1 ADRO _{20.735.669.321.653,00}

2 AKRA 2.889.153.452.375,70

3 ASII 69.303.969.920.000,00

4 BBCA 41.404.821.202.980,00

5 BBNI 35.388.969.857.250,00

6 BBRI 26.957.776.159.520,00

7 BMRI 17.026.670.686.080,00

8 BSDE 5.035.256.270.305.97

Continued Table 6

9 GGRM 10.945.248.259.250,00

10 ICBP 5.380.219.032.000,00

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12 INTP 12.527.279.853.320,00

13 KLBF 4.303.815.839.305.14

14 LSIP 2.884.709.592.960,00

15 PTBA 2.432.109.675.700,00

16 SMGR 12.468.851.393.235.50

17 UNTR 2.974.237.007.616.00

18 UNVR 9.352.784.455.000,00

b. Intrinsic value (Constant Growth FCFE approach)

Full amount Per share 1 ADRO 515.722.867.203.547,00 1.617,05 2 AKRA 5.0817.959.516.220,80 1.286,85 3 ASII 744.291.620.164.529,00 18.385,04 4 BBCA 247.855.884.413.117,00 10.154,51 5 BBNI 305.889.515.759.517,00 16.568,45 6 BBRI 154.790.081.130.934,00 6.338,02 7 BMRI 119.035.163.040.010,00 5.153,04 8 BSDE 30.739.519.610.668,70 1.597,13 9 GGRM 147.737.065.832.276,00 76.782,90 10 ICBP 61.374.586.844.927,10 10.525,65 11 INDF 241.901.243.019.694,00 27.550,06 12 INTP 18.065.673.324.373,00 4.907,51 13 KLBF 35.781.046.534.852,60 763,33 14 LSIP 103.405.727.962.146,00 15.155,77 15 PTBA 17.822.745.514.835,70 7.735,12 16 SMGR 101.944.660.234.122,00 17.186,94 17 UNTR 61.808.749.119.202,00 16.570,11 18 UNVR 39.049.219.011.732,30 5.117,85 Source: Data processed by Researcher, 2017

c. Investment decision

The types of condition to determine investment decision are undervalued or overvalued condition. Undervalued condition occurs when market price is lower than the intrinsic price, while overvalued condition of stock occurs market price is higher than the intrinsic price.

Table 8 Recommendation of investment decision using FCFE approach

10 ICBP Undervalued Buy/keep

11 INDF Undervalued Buy/keep

12 INTP Overvalued Sell

13 KLBF Overvalued Sell

14 LSIP Undervalued Buy/keep

15 PTBA Overvalued Sell

16 SMGR Undervalued Buy/keep

17 UNTR Overvalued Sell

18 UNVR Overvalued Sell

Source: Data processed by Researcher, 2017 Based on the table above, there are 9 companies undervalued and 9 companies overvalued. Recommendation of investment decision to undervalued stock is buy or keep the stock and for overvalued stock is sell the stock.

2. Price Earning Ratio (PER) Approach

a. Calculate growth rate (g) Table 9 Growth rate Source: Data processed by Researcher, 2017

b. Calculate Earning per share (EPS) estimation

Table 10 Estimated EPS 2016

No Emiten Source: Data processed by Researcher, 2017

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c. Calculate Dividend per share (DPS) estimation

Table 11 Estimated DPS 2016

The table shows that GGRM is the company that gives the highest dividend per share than the others. The DPS estimation reaches Rp. 2.783,95 per share. While, the lowest of DPS estimation is BSDE that only reaches Rp. 5,83 per share.

d. Calculate Expected return (k) Table 12 Expected return (k) 2016

The table shows that from the 23 samples the lowest expected return owned by INTP. While, the higher owned by UNVR. The calculation of expected return in PER is different with expected return or cost of equity in FCFE approach.

e. Price Earning Ratio (PER) Table 13 Estimated PER 2016

Based on the table above, it shows UNVR is the company that has highest value of PER and the lowest value owned by PTBA In general, PER is generated from earnings per share compared to the stock price. If the value PER is low, it is caused by relatively high earnings per share compared to the stock price. Thus, low value of PER is one of the main considerations for investing in addition to other factors.

f. Intrinsic value (PER approach)

Table 14 Expected intrinsic value using PER ,Source: Data processed by Researcher, 2017

The table shows the expected intrinsic value of 18 sample companies in period 2016. The highest expected intrinsic value 2016 is owned by GGRM and the value reached 55.010,61. with the determination in FCFE approach. The types of condition to determine investment decision are undervalued or overvalued condition. Undervalued condition occurs when market price is lower than the intrinsic price, while overvalued condition of stock occurs market price is higher than the intrinsic price. Table 15 Recommendation of investment decision

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Jurnal Administrasi Bisnis (JAB)|Vol. 57 No.2 April 2018| 12 INTP Undervalued Buy/keep 13 KLBF Overvalued Sell 14 LSIP Overvalued Sell 15 PTBA Overvalued Sell 16 SMGR Undervalued Buy/keep 17 UNTR Overvalued Sell 18 UNVR Overvalued Sell Source: Data processed by Researcher, 2017

Based on the table above, there are 4 companies undervalued and 14 companies overvalued. The result is pretty different with investment decision using FCFE approach.

3. Interpretation

The recommendation of investment decision using FCFE and PER approach has much difference. There are only 8 companies’ stocks that have similar recommendation of investment decision, those are AKRA, BBCA, BBRI, BMRI, KLBF, PTBA, UNTR and UNVR. The difference occurred because FCFE and PER approach have different perspective in valuing stock.

Either the recommendation of investment decision from the FCFE or PER approach is used depends on the investors themselves. Each investor has a different perspective in valuing stocks from others. In this discussion, they tend to value stocks through available cash flow to equity (FCFE approach) or earning and market price of stock (PER approach).

V. CONCLUSION AND SUGGESTION 1. CONCLUSION

Based on the analyzing process, this analysis concludes that:

a. The results of the beta calculation and cost of equity in the FCFE approach different from the common theory. This difference is due to the value of the risk-free rate of return in the research period is higher than the rate of market return. Thus, investment's interest in investment with zero risk is higher than investment with risk.

b. The result of stock valuation using FCFE with constant growth model, there are 9 undervalued companies and 9 overvalued companies.

c. From the condition of the stock, the recommendation of investment decision for 9 undervalued companies is buy or keep the

stocks. It is expected that investors can gain more profit. While, the recommendation of investment decision of overvalued position is sell the stock. Investors better to sell the stocks because it is considered to expensive. d. The result stock valuation using PER

approach, there are only 4 undervalued

companies from 18 companies. The

companies that have intrinsic value higher than market value or usually called overvalued are 14 companies.

e. The recommendation of investment decision that investor can take based on the result of PER approach is investor can buy or keep the stock of 4 undervalued companies. That companies consist of AKRA, BSDE, INTP and SMGR. The others companies are the overvalued companies. Thus, investor can take the decision to sell the stocks.

f. There are several companies that have similar stock position and recommendation of investment decision between FCFE and investors implement both of FCFE and PER approach in order to generate the best recommendation of investment decision. PER and FCFE have different indicator in generating intrinsic value. Thus, if the investors implement both approaches, it expected to be more profitable decision. b. For the next researchers who interested in

stock valuation, either FCFE or PER is the commonly approach used in valuing stock prices. But in calculation of FCFE, there are several growth models. It would be great for the next researcher to do stock valuation

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